Most owners have a number in their head. It came from a mate who sold their business "for five times profit", a broker's flyer, or a figure that felt about right after a good year.
Those numbers aren't always wrong. They're just hard to check. And plenty of owners don't have one at all: 42% aren't sure what their business is worth.*
Here's how most owner-operated New Zealand businesses are actually valued, what moves the number, and when it's worth paying for a proper business valuation.
Start with the right question
"What's my business worth?" is the obvious question. The more useful one is "worth to whom, and for what?"
A buyer paying cash, a family member taking over with vendor finance and a business partner buying you out can land on different numbers for the same business. So the first job is to pin down why you need the value. That sets the method, the level of detail and how much weight anyone else can put on the result.
The main ways to value a business
Earnings. Work out what the business really earns for its owner, then apply a multiple that reflects how risky those earnings are. This is how most trades, professional services, retail and hospitality businesses are valued, because a buyer is paying for future profit.
Assets. Take what the business owns and subtract what it owes. This suits asset-heavy businesses, holding companies, or businesses whose profit doesn't support much more than their assets. For a profitable business, it usually works as a floor.
Discounted cash flow. Forecast the cash the business will produce and discount it back to today. It works well for larger businesses with reliable forecasts. For most small businesses, the forecast carries too much guesswork.
Then there are rules of thumb: a multiple of turnover, so many times weekly takings. They're quick, but they ignore what makes your business different. Use them as a sense check, never as the answer.
How an earnings valuation works
1. Find the real profit. Start with the last three years of accounts, then adjust them so they show what a new owner would earn:
Add back one-off costs, such as a legal dispute, a major repair or a bad debt from a customer who has gone.
Add back personal costs run through the business. The family car is common. We've also seen a boat.
Take off a market salary for the work you do. If a buyer would need to hire a manager to replace you, that cost comes off the profit.
Take out one-off income, such as an insurance payout or a gain on selling an asset.
The result is often called maintainable earnings: the profit the business can be expected to keep making.
2. Work out the multiple. The multiple reflects how confident a buyer can be that the profit will continue, and whether it's growing. This is where most of the judgement sits, and where most disagreements start.
3. Multiply, then adjust. Maintainable earnings times the multiple gives the value of the business. It's then adjusted for things like surplus cash, debt and stock levels.
A worked example
A business has these figures (all made up to show the arithmetic):
Net profit before tax, three-year average: $240,000
Add one-off legal costs: $12,000
Add personal vehicle costs: $9,000
Less a market salary for the owner's role: ($105,000)
Maintainable earnings: $156,000
At a multiple of 2.5, the business is worth $390,000. At 3.5, it's worth $546,000. Same business, same profit, $156,000 apart.
Those multiples are only there to show how much one point matters. They aren't a guide to what any real business would sell for.
Notice the owner's salary, too. Many owners take their pay as a shareholder salary at year end, so the profit in the accounts looks higher than a buyer would ever see. Forget that adjustment and the value is overstated from the start.
What moves the multiple
Buyers pay more for a business that will keep making money without you. In practice, that comes down to a few things.
How much it relies on you. If customers ring you, the quotes come from you and the know-how is in your head, a buyer is paying for something that leaves with you. 82% of owners say their business relies on them at least moderately.*
Customer concentration. One customer making up a third of sales is a risk a buyer will price in.
Recurring revenue. Contracts, maintenance agreements and repeat work are worth more than one-off jobs.
Profit that turns into cash. Profit that's always tied up in debtors or stock is worth less.
Systems and records. Clean accounts, written processes and a team that knows the job.
The trend. Growing profit supports a higher multiple than flat or falling profit.
Industry and size. Some industries attract higher multiples than others, and larger businesses usually attract higher multiples than small ones.
A simple test: could you take four weeks off without your phone? If the question makes you laugh, that's where the value is hiding.
Value, price and what you take home
A valuation is a well-supported view of what the business is worth. The price is what a buyer actually pays, and that depends on who's buying, how they fund it and how much they want it.
Deal terms matter as well. With an earn-out, vendor finance or a long handover, the headline price may not be the cash you receive at settlement.
The structure changes the tax. Selling the shares in your company and selling the business's assets can give quite different results. For example, if plant and equipment sells for more than its tax book value, depreciation you've claimed is taxed back as income. Get advice before you agree how the sale is structured.
Calculator, broker's appraisal or valuation?
An online calculator is a starting point, but it can't see your add-backs, your customer list or how much of the business runs through you. Our free 1-minute scorecard is a better first step. It shows how your business compares on the things that drive value.
A broker's appraisal estimates the price your business might sell for, usually as part of listing it. It's useful when you're ready to sell, but it isn't designed to show you how to lift the value.
A valuation sets out the method, the evidence and the assumptions, so you, your family, your lawyer or your bank can follow how the value was reached. A good one also shows where value could be added.
When to get a valuation
Three to five years before you plan to sell, while there's time to fix what's holding the value back. (We cover what to work on in adding value to your business before an exit.)
Before handing over to family or key staff, so it's fair and everyone can follow it.
When you're bringing in a shareholder or buying one out.
When an offer turns up out of the blue.
Each year, if you're building towards an exit and want to track progress.
Disputes, restructures, tax, estate planning and court matters need a valuation that others will rely on. That's a different level of work, scoped and quoted separately.
What a valuation costs
At Ake, a business value estimate starts from $2,000 + GST and a business valuation report from $5,000 + GST. You'll have a fixed quote before we start, and most reports take 2–4 weeks once we have your information. There's more detail on our business valuations page.
Find out what your business is worth
If you'd like to know what your business is worth, and what would make it worth more, get a fixed-price quote or start with the free scorecard. Or call us on (07) 307 0099 for a no-obligation kōrero.
*Survey of around 2,500 Australian and New Zealand business owners with $1–5 million turnover, 2020–2025.